How bad will financial crisis get?

Government involvement deepens, investors worry as stock market nosedives again

Trader Tom Kalikas, center, works on the floor of the New York Stock Exchange near the close of trading Wednesday. The Dow Jones industrial average dropped about 450 points, and investors seeking the safety of hard assets and government debt sent gold, oil and short-term Treasury bonds soaring.

Fear and risk aversion ruled Wall Street on Wednesday as frightened investors fled financial stocks, bought commodities and sent the market plunging 449.36 points, or 4.06 percent, to close at 10,609.66. Rather than calm jitters, the Federal Reserve's $85 billion rescue of American International Group fueled investors' fears that the U.S. financial system is teetering on the edge. For the week, the Dow is down 812.33.

Federal bailout

Shares of AIG closed down $1.70, or 45.33 percent to close at $2.05. AIG officials said the government's loan will protect all of its policy holders, stabilize its credit rating and buy it time to sell off assets. If the gamble succeeds, AIG will nurse itself back to health, unhinged markets will calm down and taxpayers will turn a profit. If it fails, taxpayers get pinched, swelling the deficit and potentially driving up interest rates on mortgages, student loans and other debt.

Commodities

"The psychology right now has everyone asking, 'Who's next?'" said Jon Nadler, analyst with Kitco Bullion Dealers Montreal. "If another big bank falls, we could see an implosion and that has people very worried." That fear pushed investors into safe havens such as gold -- which posted its single-biggest gain -- and other commodities including oil, natural gas, ethanol and silver. Gold prices closed at $846.60 per ounce, up $70.10. Oil prices closed at $97.16 per barrel, up $6.01.

Housing

"The economy is not short of money," said Sung Won Sohn, an economics professor at California State University. "It is short of confidence." That confidence got another shock as new statistics showed that construction of new homes and apartments fell 6.2 percent in August to the weakest pace in 17 years. Building activity is on track to slide below 1 million for the year for the first time in more than 60 years.